Is India's GST Outpacing Economic Growth? A Closer Look at Declining Imports and Possible Tax Reforms
GST collections for August 2024 have reached ?1.75 lakh crore, marking a significant year-on-year increase of 10%. This follows the record-breaking collection of ?2.1 lakh crore in April 2024, indicating a strong start to the fiscal year. With the upcoming festive season, experts predict further growth in GST revenues, potentially signaling continued economic expansion.
To truly understand the GST story, we need to delve into its components: Central GST (CGST), State GST (SGST), and Integrated GST (IGST). While CGST and SGST apply to intra-state transactions, IGST is levied on inter-state transactions. Importantly, IGST also includes GST collected on imports, providing valuable insights into India's international trade patterns.
This stagnation mirrors the broader decline in India's merchandise and service imports, which dropped from $898 billion to $854 billion between FY23 and FY24
Stagnant IGST on Imports
When we isolate the import component, an interesting trend emerges. The IGST on imports has remained relatively stagnant over the last three years, with May collections standing at ?37,469 crore in 2022, ?41,772 crore in 2023, and ?39,879 crore in 2024. In fact, there's been a slight decline over the past year. This stagnation mirrors the broader decline in India's merchandise and service imports, which dropped from $898 billion to $854 billion between FY23 and FY24—a decrease of approximately 5%. Remarkably, this reduction occurs despite stable crude oil prices, suggesting a diminished reliance on imports by Indian industries.
This shift can be attributed, in part, to the government's efforts to correct inverted duty structures across various sectors. Inverted import duties occur when the tax on raw materials exceeds that on finished products. For example, the import duty on raw pulp is 12%, while that on finished paper is only 5%. Similar discrepancies have existed in other sectors, such as solar glass panels and electronic goods, some of which have recently been rectified. These corrections are essential for promoting domestic manufacturing and reducing import dependency.
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lowering GST rates on essential items that contribute to the inflation index, particularly in the food segment, could offer a direct way to combat inflation
Can GST Growth Outpace Economic Expansion?
However, returning to the GST figures, when we exclude the import component, the net growth in GST collections between May 2022 and May 2023 is an impressive ~12%, and between May 2023 and May 2024, it stands at an even higher 16%. These growth rates surpass the corresponding GDP or GVA growth, even after adjusting for inflation, raising questions about the factors driving this outperformance.
One potential reason for this discrepancy could be the high prevalence of unbranded goods in India, particularly in the FMCG sector. As highlighted in a previous post, a staggering 80% of India's population still consumes unbranded goods. A gradual shift from unbranded to branded products could be driving the higher GST collections, although this is difficult to confirm. It could even be a shift in the opposite direction, given the recent slowdown in FMCG growth*.
While we will delve deeper into these dynamics in future posts, our current analysis suggests that the government could consider targeted GST rate reductions. Specifically, lowering rates on essential items that contribute to the inflation index, particularly in the food segment, could offer a direct way to combat inflation. To balance this, the government could explore raising GST on discretionary and luxury goods and services.